Excess Profit Taxes: Historical Perspective and Contemporary Relevance

Summary

"Excess Profit Taxes: Historical Perspective and Contemporary Relevance" is IMF Working Paper WP/22/187 (September 2022), by Shafik Hebous, Dinar Prihardini, and Nate Vernon of the IMF's Fiscal Affairs Department, representing the authors' analysis rather than official Fund policy. Fetched and read in full (37 pages) for this entry. It is a companion piece to Baunsgaard & Vernon's "Taxing Windfall Profits in the Energy Sector" (Nate Vernon co-authored both) — that note is sector-specific to fossil-fuel extraction, while this paper treats the general, economy-wide case for excess profit taxation (EPTs).

The paper's premise: EPTs, which surged in policy interest after COVID-19 and again after Russia's invasion of Ukraine, are not a new idea. They have a documented history from World War I through World War II, and the paper argues modern policy should learn directly from that history's design successes and failures rather than reinvent EPT design from scratch.

The Core Argument / Findings

The paper's definitional anchor: "the concept of excess profit is generally equivalent to economic rent, defined as returns in excess of the opportunity cost of the investment... equivalent to returns over and above the risk-adjusted 'normal' returns." It explicitly distinguishes this from "windfall profit," which "typically refers to fortuitous gains from unanticipated events" — windfall profit can be the entire excess profit of a firm, or only part of it, with the remainder being ordinary firm- or location-specific rent unrelated to the shock. The paper treats economic rent as arising from two broad sources: firm-specific rent (chiefly monopolistic/market power) and location-specific rent (natural resources, and to some extent telecommunications).

Historical account. In the early phase of World War I, 22 countries adopted some form of EPT. The paper's Table 1 catalogs nine countries' designs: Denmark's 1915 "Gulasch tax" taxed profits above a 5% asset allowance or the pre-war 3-year average, at progressive rates from 8% to 20%; Britain's 1918–1926 "excess profits duty" taxed 80% of profit above a pre-war standard; the US 1917–1921 regime imposed the larger of a "war-profits tax" (80%) or "excess-profits tax" (30–65% progressive), reaching 95% by the 1940–1943 reenactment. As the paper puts it, "historical examples of EPTs were mainly motivated by revenue needs, while often the stated objective was to wipe 'war profits.'" UK EPT revenue reached 32% of total government revenue in 1918 (4.5% of GDP); US EPT revenue in 1943 was roughly 22% of total receipts (2.2% of GDP) — evidence, the paper argues, that EPTs "were in general successfully implemented in terms of administrability and generating revenues."

Design theory. The paper's central technical claim: an EPT can be built as a genuinely non-distortionary tax on rent alone, structurally equivalent to an "allowance for corporate capital" (ACC) or "allowance for corporate equity" (ACE) — a base that deducts a normal, risk-adjusted return to capital before taxing what remains, "leaving investment decisions unaffected at the margin." Most historical EPTs were already a crude ACC-style design — taxing returns above a fixed percentage threshold — though the formal theory (Boadway & Bruce 1984; Devereux & Freeman 1991) came decades later. Poorly calibrated, an EPT can "gold-plate" investment (tax savings exceeding true cost of capital), and a temporary EPT specifically risks distorting investment timing — front-loading spending into the taxed window, delaying profit realization until it expires.

What's new for the 2020s that wasn't a problem in 1918. "Different from that era, though, profit shifting is now a challenge." Using BEA data on US multinationals' foreign affiliates (51 countries, 2016–2019) and OECD country-by-country data, the authors find the geographic distribution of multinationals' "excess profits" concentrates heavily in known investment hubs rather than real economic activity — median excess profit of roughly 1.9% of GDP in investment hubs versus 0.01% of GDP for the median low-income country. This means a unilaterally imposed EPT would raise most of its revenue where profits are already artificially booked: "the results illustrate the importance of profit shifting, and thus the need for either coordination or adopting a world-wide approach to the EPT." A coordinated EPT on multinationals' globally consolidated profits, allocated by sales destination (likened to the OECD's Pillar 1), would raise global revenue by roughly 4% of current global corporate-tax revenue as a full replacement, or about 16% as a 10% add-on.

Relation to the Georgist Case

This paper is the clearest explicit rent-gradient design lesson among the wiki's excess-profits sources, because its historical EPTs deliberately mixed pure rent with quasi-rent and the paper says so. Its own taxonomy places location-specific resource rent closer to the clean, land-like end (see Economic Rent) and firm-specific monopoly/market-power rent as a separate, less structurally guaranteed category — "the source of economic rent can be firm-specific, mainly due to monopolistic power... Economic rent can also be location-specific, most notably in the extractives." Its central recommendation — an ACC/ACE-style allowance exempting the normal return and taxing only the residual — is a general tool for separating rent from the return needed to induce investment, applicable across the gradient from land to firm-level quasi-rent, but with sharply different confidence depending on where the taxed profit sits: for pure location rent (extractives), the paper treats the theoretical case as settled; for firm-specific "excess profit" more broadly, it is explicit the underlying profit is often not cleanly separable from normal return in practice — the historical record shows why, quoting Plehn's 1920 verdict on the WWI episode that "so post hoc easily became propter hoc and all profits were drawn into the net."

Nuances and Limits

• A working paper, not peer-reviewed. IMF Fiscal Affairs Department staff analysis, useful for institutional authority and detailed historical/design documentation, but below peer-reviewed empirical work in the wiki's source hierarchy.
• The rent/normal-return split is theoretically clean but empirically imputed. The paper is explicit that "the 'true' normal return is unobserved" — every real EPT (historical or in the paper's own revenue estimates) uses an imputed allowance rate (8–10% in most examples) as a practical stand-in, not a directly measured opportunity cost.
• Revenue estimates are static and directional, not dynamic. They "abstract from dynamic behavioral effects that include possible changes in firm investment and location decisions" and are upper-bound estimates for a unilateral EPT, since unilateral implementation would predictably shift reported profit elsewhere.
• Sector-general focus, not extractives. The paper "will only touch upon but not dwell on" the extractive sector, deferring to the companion Baunsgaard & Vernon note — its general-EPT design recommendations are not a substitute for the sector-specific resource-rent literature.
• Historical EPTs are cited as administratively successful, not necessarily well-targeted. The paper credits strong historical revenue performance but presents no evidence on how much came from genuine economic rent versus ordinary wartime profit inflation broadly shared across the economy — the Plehn quote is itself a period acknowledgment of poor targeting.

Bears On

• Research: Baunsgaard & Vernon, "Taxing Windfall Profits in the Energy Sector" — direct companion paper (overlapping IMF author, same season); this paper generalizes that note's fossil-fuel rent-targeting logic to the broader corporate-profits case and is the more detailed technical source on ACC/ACE mechanics.
• Research: Power & Frerick, "Excess Returns" — both papers converge on a large and growing share of the corporate tax base being economic rent rather than normal return, from different data sources (Treasury microdata vs. IMF cross-country multinational data).
• Objection: Taxing quasi-rents kills innovation — the paper's caution that temporary EPTs distort investment timing ("gold-plating"), and that firm-specific excess profit is often not cleanly separable from the normal return justifying risk-taking, is a real-world concession strengthening the objection's general premise — even as the paper argues a permanent, well-calibrated ACC/ACE-style EPT largely avoids the distortion.
• Problem: Corporate profits increasingly reflect economic rents — the cross-country excess-profit estimates (roughly 1.9% of GDP in the median investment hub) are additional evidence, from an IMF dataset independent of the wiki's existing markup literature, that a meaningful share of recorded corporate profit exceeds any plausible normal return.

See Also

• Baunsgaard & Vernon, "Taxing Windfall Profits in the Energy Sector"
• Power & Frerick, "Excess Returns"
• Objection: Taxing Quasi-Rents Kills Innovation
• Corporate profits increasingly reflect economic rents
• Economic Rent

Sources

1. Shafik Hebous, Dinar Prihardini & Nate Vernon (2022), "Excess Profit Taxes: Historical Perspective and Contemporary Relevance," IMF Working Paper WP/22/187, International Monetary Fund, September 2022. PDF — used for all findings, the historical EPT table, the ACC/ACE design theory, the profit-shifting revenue estimates, and all direct quotations; fetched and read in full (all 37 pages) this session.
2. Thomas Baunsgaard & Nate Vernon (2022), "Taxing Windfall Profits in the Energy Sector," IMF Note NOTE/2022/002, International Monetary Fund, August 2022. PDF — used only to characterize the companion-paper relationship between the two documents (shared author, overlapping subject, different sector scope), not for independent claims in this entry beyond what is already sourced on that paper's own wiki page.